Hydraulicfracturing, commonly referred to as fracking, is a drilling process used in the extraction ofunderground oil or natural gas trapped in hard-to-reach shale rock formations deepwithin the earth. The process involves well construction,acquisition of source water, well stimulation by hydraulicfracturing (using fluids that typically contain a variety ofchemicals), and waste disposal.

Advances in horizontal drilling technology make significantshale gas formations newly accessible for development. As a result,natural gas production in the U.S. is at its highest level in morethan 30 years.

The rise of fracking offers the potential for a significanteconomic boom to the areas with major formations containingsubstantial amounts of natural gas, including states such asNorth Dakota, Pennsylvania, Texas, Colorado, and Louisiana. However, it is not without controversy. As thefracking industry grows, so too do media reports and governmentalinvestigations regarding its perceived risks. It was only a matter of time before litigation ensued, involving those both engaged in andallegedly impacted by such activity.

This current and anticipated litigation has and willincreasingly impact the property and casualty (P&C) insurance industry, raisingnumerous coverage and liability issues. This article focuses onthose coverage and liability issues brought on by frackinglawsuits.

Liability Suits Spreading
Numerous liability suits pertaining to fracking activities havealready been filed in the state and federal courts of Pennsylvania,Texas, Arkansas, and elsewhere. Property owners who sold mineralrights and residents in production areas brought civil claimsagainst operators, alleging damages under several factualscenarios.

Initially, these actions focused on allegations of contaminationto surrounding land, ground, and surface water. Suspected causes ofcontamination include faulty well-casings, improper drilling,and/or improper disposal of fracking fluids. These plaintiffs tendto live predominantly in rural areas with private water wells saidto be contaminated with fracking chemicals. Meanwhile, otherplaintiffs allege high quantities of non-fluid substances in theirwells as a result of the fracking activity that caused hazardoussubstances, such as methane, to migrate into the wells.

Recently, plaintiffs and their attorneys have pursued a varietyof additional allegations of injury resulting from fracking. Someplaintiffs charge that fracking results in air pollution and excessnoise, both with regard to the drilling process itself andcompression stations employed.

Is Fracking Causing Tremors andSinkholes?
During the end of 2011, a number of actions were filed alleging farmore serious consequences: that fracking activity has given rise toearthquakes resulting in property damage. These cases arelikely related to recent scientific studies suggesting thatfracking may cause earthquakes in areas that previously experiencednegligible seismic activity.

Experts expect still more claims to arise, including allegationsthat by wearing away limestone formations, fracking leads to groundsubsidence and sinkholes. In light of recent media investigations, otherclaims may arise regarding the safety of pipelines required totransport the gas extracted from fracked wells.

Causes of Action
Causes of action in fracking lawsuits have been asserted undercommon-law theories such as strict liability, negligence, privatenuisance, physical trespass–usually based upon allegations thatcontaminated materials generated by fracking have infiltratedplaintiff’s property–medical monitoring, emotional distress,“inconvenience and discomfort,” and negligence per se. Varioustheories of damage have been presented, including: bodily injury,diminution in property values, breach of quiet enjoyment, loss ofbusiness, increased risk of disease, and punitive damages.

Besides claims for monetary damages–including punitive damagesand attorneys’ fees–plaintiffs frequently seek injunctions to stopdrilling activity and to mandate remediation of allegedcontamination.

Putative Class Action, Mass Torts
While many of the lawsuits filed by purportedly injured propertyowners and residents have been individual in nature, a significantnumber of these suits have been presented as putative classactions. At least 10 such actions have been filed in recent years,particularly in the state of Arkansas. Typically plaintiffs andputative class members in these actions are residents of an areaadjacent to or near a fracking site. These claimants may thusallege that fracking activities polluted their air, land, and/orwater. Putative class actions have also been filed regardingallegations that fracking caused seismic activity.

Several mass torts, as well, are being filed on behalf ofmultiple plaintiffs who claim to have sustained personal injuryfrom hydraulic fracturing.

A number of fracking lawsuits have been brought by propertyowners who entered into leases with natural gas companies fordrilling rights on their land. Aside from the causes of action setforth above, these property owners may assert claims for the breachof lease provisions stipulating that the drilling company will takesteps to mitigate any potential fracking-related environmentaldamage to the lessor’s property.

These property owners may also raise fraud claims based upon allegations that a natural gas companyinduced these individuals to enter into the leases bymisrepresenting or failing to disclose the potential damage totheir property that could arise from fracking.

Residents and/or property owners of allegedly affected areas aretypically bringing the lawsuits against the natural gas drillingand exploration company spearheading the fracking operations.

Insureds, such as construction contractors, tradesubcontractors, design professionals, chemical suppliers, andtransportation companies, are also likely to have claims pursuedagainst them.

Beyond Residents andLandowners
Fracking lawsuits may also be asserted by laborers who contend thatthey have sustained injury. While workers’ compensation law in most states will limit the abilityto pursue such claims against one’s employer, laborers will likelypursue actions against other entities involved, or may raiseallegations that will invoke exceptions to the general prohibitionon lawsuits against an employer. On example of such a claim wouldbe that an employer engaged in willful, wanton, or recklessconduct.

The Court’s View
As most fracking lawsuits are yet to be filed or are still in theearly stages of litigation, there is comparatively little guidanceas to the chances that this type of claims will succeed. However,decisions pertaining to motions to dismiss offer some guidance onhow courts may view certain causes of action typically asserted infracking litigation.

Claims of strictliability, for example, have often been based on allegationsthat hydraulic fracturing is an “ultra-hazardous” or “abnormallydangerous” activity. Courts have typically rejected defensearguments that such claims should be dismissed because fracking isnot “ultra-hazardous” as a matter of law. Courts have instead heldthat this question is fact-specific, although they have expressedsome skepticism as to the ability of plaintiffs to establish theseclaims at trial.

Courts also recognize the ability to assert claims for medicalmonitoring on behalf of plaintiffs and/or putative class memberswho allege that the activity at issue has placed them atsignificant risk for physical injury. However, such an injury maynot be visible at the time of filing.

A claim like this seeks to have the defendant pay for a programthat periodically monitors plaintiffs for the purpose of diagnosingand treating the illness or illnesses that they are at risk ofdeveloping as a result of fracking activities.

Presenting Proof
Liability in fracking lawsuits will ultimately bring on causationissues. Courts are likely to require plaintiffs to establish, to areasonable degree of certainty, that any particular injury was theresult of the defendant’s fracking operations. A plaintiff will berequired to demonstrate a link between the presence of a particularchemical or other foreign substance in the atmosphere, water,and/or land and defendant’s fracking activities.

The absence of environmental studies prior to the onset offracking operations will make it quite challenging to establish ageneral link between fracking and potential contamination. Even ifsuch a general link can be shown, a plaintiff still must establisha connection between the contamination and the fracking operationsof a particular defendant. In regions with abundant natural gasdeposits in shale formations, many operators are likely to becarrying out fracking activities within close proximity of eachother. This may make it difficult to establish that a particularenvironmental contamination was the result of a specific entity’soperations. When questions like these reach juries, the answers canbe unpredictable and expensive.

Regarding both general and specific causation issues, expertopinions will play a pivotal role. State legislation is evolving,which may result in presumptive causation based upon the claimant’sproximity to the fracking operations.

Issues for CGL Insurers
The expected onslaught of fracking lawsuits is likely to present anumber of unique coverage issues for commercial general liability(CGL) insurers. These issues include when coverage was “triggered”under a CGL policy. Depending upon the jurisdiction, coverage maybe triggered when an event that allegedly caused a subsequentinjury actually occurred, or when the injury itself becamemanifest.

As seen with regard to asbestos litigation, particular challenges are presented byallegations of injury pertaining to a period of continuous exposureto hazardous substances. Approaches developed in response to thedetermination of CGL coverage for asbestos, such as applying a“continuous trigger,” may be applied in appropriate cases tohydraulic fracturing claims.

CGL claims arising from fracking litigation are also likely topresent issues regarding the application of standard pollutionexclusions. Specifically, it may be necessary to decide whethercertain elements of materials used in fracking fluids may be deemedpollutants for purposes of such exclusions, and if so, then whetherthese materials render the fracking fluids themselves pollutants.These issues may present matters of first impressions for trial andappellate courts.

An Insurer’s Duty
The scope of coverage for liability insurance policies will also berelevant to demands for the defense and indemnification of frackinglawsuits. As noted above, such lawsuits may raise allegations, suchas breach of contract, that go beyond the allegations of “bodilyinjury” and “property damage” for which CGL policies typicallyprovide coverage. As many states require insurers to provide a fulldefense for lawsuits even if only some of the claims fall withinthe scope of coverage, this issue may have little relevance to aliability insurer’s defense obligations. This issue, however, willobviously be significant in many cases regarding an insurer’s dutyto indemnify.

Additionally, scrutiny by the Securities and Exchange Commission (SEC) regardingrepresentations as to both production and environmental risk maytrigger both directors and officers (D&O) and errors andomissions (E&O) policies written for shale gas and otherinvolved companies.

Fracking lawsuits and other claims will present a vast array ofadditional issues that are beyond the scope of this discussion,including coverage obligations for fracking damage underfirst-party property insurance policies, and the potential duty todefend and indemnify fracking lawsuits under E&O coverage.Insurers should take steps at the present time to identify,examine, and analyze insurance coverage and liability issuespresented by this type of litigation. Such an approach will helpensure that carriers are prepared to effectively address frackingissues.